Understanding the New Thin Capitalisation Rules
The Australian Taxation Office (ATO) has released draft guidance on the third party debt test (TPDT) as part of the new thin capitalisation provisions. This guidance is critical for businesses with significant debt financing, particularly those affected by recent legislative changes.
The draft guidance includes:
- Draft Taxation Ruling TR 2024/D3, which provides interpretative guidance on the third party debt conditions that entities must meet to qualify for the TPDT.
- Updated draft Practical Compliance Guideline (PCG) 2024/D3, which now includes Schedules 3 and 4, outlining the ATO’s compliance approach to TPDT and related restructures.
Key Insights from ATO’s Draft Guidance
1. Interpretation of the Third Party Debt Test (TPDT) Conditions
The TPDT conditions are crucial for businesses seeking to qualify under the new thin capitalisation rules. The ATO’s draft ruling TR 2024/D3 provides clarity on:
- Test timing – When the TPDT must be assessed.
- Application to partial-year debts – How the test applies to debts issued for only part of the income year.
- Definition of key terms – Clarifications on terminology used in the TPDT.
However, the draft ruling does not cover conduit financing rules related to TPDT, meaning businesses will need to seek separate guidance on these aspects.
2. ATO’s Compliance Approach to TPDT (PCG 2024/D3 – Schedule 3)
While TR 2024/D3 presents a strict interpretation of the TPDT conditions, Schedule 3 of PCG 2024/D3 provides practical compliance guidance, acknowledging that:
- The new thin capitalisation rules were enacted late, leaving businesses limited time to restructure.
- Certain restructures may be undertaken to align with TPDT conditions.
- The ATO will provide leniency within specific timeframes for businesses to comply.
3. Guidance on Restructures (PCG 2024/D3 – Schedule 4)
Given the impact of the thin capitalisation changes, many businesses are restructuring their debt arrangements. Schedule 4 of PCG 2024/D3 outlines:
- The types of restructures that the ATO will scrutinise.
- The time limits for compliance to benefit from the ATO’s compliance approach.
4. Consultation Period and Next Steps
The ATO is accepting comments on both TR 2024/D3 and PCG 2024/D3 until 7 February 2025. Businesses and tax professionals are encouraged to review their debt arrangements and provide feedback where necessary.
How Boa & Co. Can Assist
Navigating the new thin capitalisation rules and ensuring compliance with the third party debt test can be complex. At Boa & Co. Chartered Accountants, we help businesses:
- Assess their debt structures to determine TPDT compliance.
- Implement restructuring strategies in line with ATO guidance.
- Prepare for ATO compliance reviews and manage potential risks.
Get expert advice today. Call us at 1300 952 286, email [email protected], or visit www.boanco.com.au to ensure your financing structures remain compliant.